Former Citigroup CEO Weill Says Banks Should Be Broken Up

Former chairman and chief executive officer of Citigroup Inc. Sandy Weill said, “The world we live in now is not the world we lived in 10 years ago.” Photographer: Hannelore Foerster/Bloomberg

July 26 (Bloomberg) -- Sanford “Sandy” Weill, whose
creation of Citigroup Inc. ushered in the era of U.S. banking
conglomerates a decade before the financial crisis, said it’s
time to break up the largest banks to avoid more bailouts.

“What we should probably do is go and split up investment
banking from banking,” Weill, 79, said yesterday in a CNBC
interview. “Have banks do something that’s not going to risk
the taxpayer dollars, that’s not going to be too big to fail.”

Weill helped engineer the 1998 merger of Travelers Group
Inc. and Citicorp, a deal that required repeal of the
Depression-era Glass-Steagall law that forced deposit-taking
companies backed by government insurance to be separate from
investment banks. The New York-based company became the biggest
lender in the world before taking a $45 billion taxpayer bailout
in 2008 to avoid collapse.

Weill joins regulators, investors, analysts, former bankers
and lawmakers in calling for the break-up of too-big-to-fail
banks to unlock shareholder value and prevent another financial
crisis.

“There is finally a growing recognition among a wide range
of market analysts, financial market participants and policy
makers that the repeal of Glass-Steagall was a mistake,” said
Thomas Hoenig, a Federal Deposit Insurance Corp. board member
and former head of the Kansas City Federal Reserve. “It’s time
now to restrict banks to core services.”

House Bill

Rep. Brad Miller, a Democrat from North Carolina, has
introduced legislation that would cap the size of the biggest
banks.

“There are very credible establishment voices now saying
we really gain little if anything from the size and complexity
of these banks,” Miller said in an interview. He said he
doesn’t hold out much hope the Republican-controlled House of
Representatives will take up his bill, meaning any breakup would
be up to shareholders taking the initiative.

Arthur Levitt, a former business partner of Weill’s who was
chairman of the Securities and Exchange Commission when
Citigroup was created, said Weill was “largely responsible”
for the rollback of Glass-Steagall.

“He fought very hard for it, and really what Sandy did was
to take advantage of regulators who weren’t and still aren’t
doing their job,” said Levitt, who is a member of the board of
Bloomberg LP, the parent of Bloomberg News.

‘Weak’ Job

Levitt said he regrets supporting the bill that overturned
Glass-Steagall, and didn’t realize “how weak a job as
regulators the Fed and Comptroller’s office were doing,”
referring to banking oversight by the Federal Reserve and Office
of the Comptroller of the Currency.

David Knutson, an analyst with Legal & General Investment
Management, said it was hard to believe Weill, “the shatterer
of Glass-Steagall,” has now changed his mind. “He enjoyed the
benefits of the demise of Glass-Steagall and only now has he
become remorseful? Where was he five years ago?” said Knutson,
whose firm owns bonds sold by Citigroup and JPMorgan Chase &
Co., now the biggest U.S. bank by both deposits and assets.

Directors of Citigroup paid Weill about $1 billion,
including stock, during his 17 years as CEO, as he assembled a
behemoth with operations across the world that offered
investment banking, trading, commercial banking, insurance and
consumer finance. He left the board in 2006.

Taxpayers rescued Citigroup in 2008 after losses tied to
subprime mortgages threatened the financial system. Bank of
America Corp. also accepted a $45 billion bailout while JPMorgan
and Wells Fargo & Co. each took $25 billion. Goldman Sachs Group
Inc. and Morgan Stanley were given $10 billion apiece.

Taking Deposits

“We can have size and scale but it doesn’t have to be
connected to a deposit-taking institution,” Weill said in the
interview. “Have banks be deposit-takers, have banks make
commercial loans and real estate loans.”

Banks would be even more valuable if they heeded his
advice, Weill said. Citigroup’s shares, which traded as high as
$564.10 at the end of 2006 adjusted for a reverse stock split,
plummeted to $10.20 during March of 2009, six months after
Lehman Brothers Holdings Inc. filed for bankruptcy protection.
They closed at $25.79 yesterday.

Jon Diat, a spokesman for the bank, declined to comment on
the remarks by Weill, who held the positions of chairman and
chief executive officer of Citigroup after the Travelers merger.
He retains the title of chairman emeritus.

Parsons, Reed

Richard Parsons, who earlier this year ended a 16-year
tenure on Citigroup’s board, said in April that the repeal of
Glass-Steagall made the business more complicated and ultimately
helped cause the financial crisis. Former Citicorp CEO John Reed
apologized in 2009 for his role in building Citigroup and said
banks that big should be divided into separate parts.

The four most complex U.S. financial holding companies --
JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America --
each contain more than 2,000 subsidiaries, with two of those
controlling more than 3,000 subsidiaries, according to a
research paper published this month by the Federal Reserve Bank
of New York. Citigroup has 1,645. Just one firm exceeded 500
subsidiaries in 1991, the report shows.

Weill said he hasn’t spoken with Citigroup CEO Vikram
Pandit, 55, or JPMorgan’s Jamie Dimon, 56, about his change of
heart. Dimon is a former protege of Weill’s and helped build
Travelers before the merger with Citicorp.

Wall Street chiefs have resisted calls to break up their
companies. Morgan Stanley CEO James Gorman, 54, described the
debate as a “knee-jerk discussion” in a June 27 interview.

Dimon’s View

Dimon said he disagreed with a shareholder who asked on a
July 13 conference call whether the bank had become too big to
manage.

“I beg to differ,” Dimon said. “There is huge strength
in this company that the units get from each other.”

Breaking up the banks into different parts would make the
firms much more valuable, Weill said. The stocks of five of the
six biggest U.S. banks -- Citigroup, JPMorgan, Bank of America,
Goldman Sachs and Morgan Stanley -- are languishing at or below
tangible book value. That means different pieces of the banks
are worth more than the whole, fund manager Michael F. Price
said last month.

Citigroup’s shares trade at 50 percent of tangible book
value and New York-based Morgan Stanley’s are at 47 percent,
according to data compiled by Bloomberg.

“Now you have the preeminent creator of the large
financial-conglomerate model agreeing that large banks should be
broken up,” Michael Mayo, an analyst at CLSA Ltd. in New York
who has covered the largest U.S. banks since before Glass-Steagall’s repeal, said in an interview. “It’s going to make
some people pretty upset, since he’s the one who created the
current Citigroup model, and now he’s saying, ‘Look, we messed
up.’”

Greenspan Speech

Even Alan Greenspan, who fought for the repeal of Glass-Steagall when he was chairman of the Federal Reserve, said in
2009 that breaking up the banks might make them more valuable.

“In 1911, we broke up Standard Oil -- so what happened?”
Greenspan said at New York’s Council on Foreign Relations. “The
individual parts became more valuable than the whole. Maybe
that’s what we need to do.”

Weill altered his view about the industry because “the
world changes,” he said, adding that he’s “been thinking about
it a lot over the last year.”

“The world we live in now is not the world we lived in 10
years ago,” Weill said. “Good things are simple.”

Former President Bill Clinton said when he signed the
repeal of Glass-Steagall in 1999 that it was “no longer
appropriate” for the economy.

“The world is very different,” Clinton said at a White
House signing ceremony.